Asset Protection Blog – Asset Management – Asset Allocation

Earlier this week, the World Health Organization declared the spread of the H1N1 flu virus, the causative agent of the so-called “Swine Flu” to be a “flu pandemic.”  This is the first time in more than 40 years that the WHO has made such a declaration.  And it seems rather odd that it would do, given that this “pandemic” has had such minimal impact.  The last time that the WHO declared a flu pandemic was in 1968, when the Hong Kong flu strain killed more than a million people.  By contrast, as of June 15, the H1N1 flu strain has killed a mere 163 people.  That’s a significant number, but by comparison, complications of ordinary flu kill about 36,000 Americans every year.  True, the spread of the H1N1 strain technically meets the definition of a pandemic—an epidemic that is geographically widespread.  Since its discovery in April in Mexico, the virus has spread to 74 countries on five continents. But the pandemic declaration also has some very significant collateral side effects that could be extremely useful to banks, insurance companies, and hedge funds locked into losing positions on derivative contracts.  Call me paranoid if you want, but many such contracts contain a “force majeure” clause that allow the signatories to cease meeting their obligations in situations beyond anyone’s control. Pandemics are typically listed as reasons for calling a force majeure . Now, it so happens that Friday, June 19 is a very significant date when it comes to derivative contracts.  That’s because the last hour of trading will be one of only four so-called “Quadruple Witching Hours” each year, in which contracts for stock index futures, stock index options, stock options and single stock futures all expire simultaneously.  That’s only two days away, but if all hell breaks loose in the markets between now and then—or if any of the counter-parties for these contracts can’t deliver—they may well declare force majeure . Seen in this light, the WHO’s declaration of pandemic may be more of an economic diversion than a public health emergency.  Indeed, interpreted in this light, a more accurate rendition of “swine flu pandemic” may be one its anagrams; “unwind limp faeces.” Copyright © by Mark Nestmann

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Will Pandemic Declaration Lead to Financial Defaults?